After believing that diplomatic negotiations were bearing fruit and that troops were withdrawing, at the beginning of the week we saw Russia launch a full-scale offensive into Ukrainian territory; at the time of this writing, Ukraine was on the verge of losing control of its capital, Kyiv. To be honest, I have little idea how far this might escalate, what the real reasons for the conflict are (the real ones, not the stated ones), or what an eventual outcome might look like. I’ll leave that to those who know more, especially those with a historical understanding of conflicts from a perspective different from ours in the West. But that doesn’t mean we can’t—based on what we know so far—make some adjustments to the macroeconomic outlook for the short and medium term relative to the baseline scenario for 2022.

First, it is crucial to view this episode as a supply shock. This is vital when projecting possible stabilization measures by, for example, central banks. Second, far from helping to solve any of the major problems stemming from the pandemic, this situation would only make them worse: supply chain disruptions, pressure on food prices, rising energy prices, etc. Third, increased volatility has impacted and will continue to impact markets, which could make things even more challenging for emerging markets that are already struggling.

Without wishing to downplay the human suffering that any war causes (which is this economist’s number one concern), I believe this invasion makes the decisions that monetary policymakers will need to make in the coming months even more difficult. On the one hand, they will now have more reasons to raise rates, in a clearly more inflationary environment, but on the other hand, the effects on economic activity (more pronounced in Europe, less so in the U.S.) could delay the long-awaited normalization. Unfortunately, the duration of the conflict, the sanctions imposed, and the ability to replace some Russian exports will be crucial in determining how long this pause in the rate-hiking process should last.

At the local level, the greatest risk stems from oil prices remaining above US$100 (or even higher) for an extended period, as well as food prices that could continue to rise. Some of this could be offset by increases in the prices of copper and other commodities we export, but the overall balance tilts toward the negative. However, returning to what I mentioned at the beginning of the second paragraph, there is little the Central Bank can do in the face of a pure supply shock. If we consider additional increases in the TPM beyond what we have already projected, I believe these should only be considered in the event of more persistent decoupling of inflation expectations—and not in response to CPI data that might be higher than estimated, especially if driven by fuel or food prices.

Now is the time to be cautious and not make hasty decisions—which doesn’t mean we have to be passive. Let’s hope that diplomacy and negotiations prevail once again and that this invasion is short-lived. From the end of the world, for now, we’re left to watch from the sidelines.

Nathan Pincheira 

Chief Economist at Fynsa